Americans cranked up their use of credit cards in the third quarter of 2012, racking up more debt than a year ago, while also being less diligent about making payments on time, an analysis of consumer-credit data shows. (David Goldman/AP)

By Danielle DouglasDecember 13, 2012

Anyone who has ever applied for a loan or tried to rent an apartment knows the importance of having a good credit score. Yet there is little understanding of how those scores are devised.

A new paper released Thursday by the Consumer Financial Protection Bureau lifts the veil off of credit reporting, revealing that the way consumers use the plastic in their wallets weighs heaviest on their scores.

While that’s not too surprising, considering that Americans own nearly 610 million credit cards, the finding does cast new light on the gravity of failing to keep up with those accounts.

Researchers at the government’s consumer watchdog analyzed hundreds of millions of files submitted by the three largest credit agencies — Equifax, TransUnion and Experian.

Each agency receives updates on more than 1.3 billion individual accounts from some 10,000 companies in a typical month.

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What the ‘fourth bureau’ tracks

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A growing network of companies deals in personal data once deemed unobtainable and unreliable. Dubbed the “fourth bureau,” it is becoming the gateway to credit for as many as 50 million people who live on the margins of the economy. Here’s what these companies track:

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A growing network of companies deals in personal data once deemed unobtainable and unreliable. Dubbed the “fourth bureau,” it is becoming the gateway to credit for as many as 50 million people who live on the margins of the economy. Here’s what these companies track:

More than half of the information on the average credit rating report is supplied by the credit card industry. Credit scores are calculated from the information in the report and then used to measure the likelihood of a consumer repaying his or her debts.

“Credit cards are given great weight in credit profiles — a lesson that consumers could end up learning the hard way,” said Richard Cordray, director of the CFPB, during a call with reporters.

During the holiday season, he said, consumers may be enticed to open a new retail credit card with the promise of an extra discount on their purchase. If they are not responsible with that card, “it could end up costing them a lot more down the line when they go take out a mortgage and that credit card is a black mark on their credit report.”

Indeed, but there is a body of research that suggests consumers are relying on plastic for everyday needs, not occasional wants, making the prospect of maintaining a healthy credit profile challenging.

Staying current on payments or reducing the use of credit cards has been difficult for many Americans contending with stagnant wages, unemployment or underemployment, as the Center for Responsible Lending noted in its latest study Wednesday.

The consumer advocacy group, using research from Demos, said about 40 percent of low- and middle-income households rely on credit cards to pay for basic living expenses, such as rent, groceries and utilities. Medical bills have also become a leading contributor to credit card debt in the aftermath of the recession.

Americans, nevertheless, have managed to pay down high credit card balances coming out of the recession, a trend the consumer lending group partly attributes to credit card reforms.

Industry practices, such as high penalty rates and unclear fee structures, were banned or curbed by the Credit Card Accountability Responsibility and Disclosure Act of 2009. Price transparency, according to the report, is allowing consumers to better manage their debt.

In recent years, predatory lending practices saddled many Americans, especially minorities, with credit cards or mortgages with exorbitant rates and fees that increased the chances of default. When those consumers defaulted, their credit scores tumbled as the reporting agencies perceived them as credit risks.

The CFPB raised the concern that credit scores have the potential to reinforce the effects of discrimination, but stopped short of offering solutions.

The consumer agency has the authority to supervise a wide array of financial actors who impact consumer credit, including credit card companies and credit reporting agencies. The latest report is a follow up to a study released in October on widespread discrepancies in credit reports.

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Comments our editors find particularly useful or relevant are displayed in Top Comments, as are comments by users with these badges: . Replies to those posts appear here, as well as posts by staff writers.